Telefonica Loses Appeal Against $205 Million Regulatory Fine

Spain's Telefonica has lost an appeal against a fine imposed on it after it was found guilty of abusing its dominant position in the domestic broadband market.

The EU Court of Justice upheld a European Commission decision of 2007 that
had fined Telefónica for a margin squeeze in the Spanish broadband market, in
breach of EU antitrust rules.

This judgment is significant because it confirms the Commission's power to
enforce competition law against abuses committed on regulated markets and the
Commission's methodology to establish the existence of a margin squeeze.

In July 2007 the Commission fined the Spanish incumbent telecoms operator
Telefónica EUR151 million (USD205 million) for abuse of its dominant position in the Spanish
broadband market . Between 2001 and 2006, Telefónica's wholesale prices charged
to competitors and retail prices charged to its own customers were set at a
level that forced competitors to make losses if they wanted to match
Telefónica's retail prices.

In March 2012 the General Court upheld the Commission's decision in its
entirety. Telefónica appealed the judgment to the Court of Justice, seeking to
annul the decision or in the alternative to annul or reduce the fine.

In particular, the Court confirmed that the Commission correctly demonstrated
the existence of a margin squeeze with potential anticompetitive effects.
Notably, the court found that Telefónica's actions were likely to reinforce the
barriers for entry or expansion of competitors in the retail broadband market.

The Commission's Decision

The Commission's decision defined three wholesale markets: unbundled access
to the local loop, regional wholesale access and national wholesale access.

It established that the margin between Telefónica's retail prices and the
prices for the two latter wholesale products was insufficient to cover the costs
that an operator as efficient as Telefónica would have to incur to provide
retail broadband access. A competing telecoms operator that was as efficient as
Telefónica was therefore faced with the choice of either exiting the market or
incurring losses. This represented an important obstacle for competing
operators, given that Telefónica was the only Spanish operator with a
nation-wide fixed telephone network and that it was uneconomical to duplicate
such a network.

The fact that some of the wholesale prices were regulated did not alleviate
Telefónica's responsibility.

Telefónica knew that the estimates made by the national regulator were not
matched by its own business plan and its actual costs. Internal documents show
that the company was aware that it was engaging in a margin squeeze. Moreover,
Telefónica was at all times free to end this margin squeeze by lowering its
wholesale prices, given that its national wholesale prices were not regulated
and its regional wholesale prices were only subject to maximum prices. However,
Telefónica did not take this initiative until it was required to do so by the
Spanish regulator in December 2006.

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